6 steps to create a balanced business budget

With the new year in full swing, there’s no better time to look closely at your finances and make a plan to support your business. The good news is that you don’t need to be a financial whizz to create a brilliant business budget. Here are the steps you can take to build a budget that can guide you through the year ahead.

First off, what’s a business budget?

In short, a business budget is a record of what you plan to spend and how much revenue you anticipate your business will earn over a period of time - usually a year. A good business budget should help you to stay on top of your business’s financial responsibilities and plan ahead for the outcomes you want to achieve. Heads up, if you’re hoping to secure funding for your business, you’ll definitely need to prepare a budget as part of your business plan.

How to create a business budget

1. Make calculated assumptions

To an extent, all business budgets are based on a set of assumptions and previous experience (unless you’re a clairvoyant). Your budget will reflect your ‘best guess’ on factors like market demand, price tolerance and availability of suppliers. But don’t worry, you aren’t expected to predict the future. Top tip: document your assumptions and the thinking behind them so that you can refer back when needed and adjust your budget in the future if the situation changes.

2. Focus your objectives

When writing your business budget, take your financial objectives into account: are you aiming for a profit, expecting a loss or hoping to break even over the year? Remember that not every year ends in profit (and that’s okay). For example, if your business is brand new or you recently made an investment that will take a while to recoup, you might not expect to make a profit for some time.

3. Tally up your operational costs

Operational costs are the expenses you incur in the day-to-day running of your business and are a key component of your business budget. For example, some key operational costs might be rent for your office space, supplies, utility bills and staff pay. There are three types of costs:

• Fixed - the same amount for every payment (e.g. rent, staff pay)
• Variable - a different amount for every payment (e.g. supplies, overtime payments)
• Stepped - a fixed cost that has increased (e.g. taking on a second shop, which will increase your rent)

While fixed and stepped costs are easier to predict than variable costs, it’s important to account for all anticipated costs in your business budget.

4. Account for projects that support your goals

It isn’t just your day-to-day work that contributes to your business goals. Within your business budget you should also allocate funds for one-off projects that you’re planning outside of your usual scope of work to drive your business forward. For example, launching a marketing campaign, moving to a larger office, growing your team or expanding into new markets. By including costs associated with each of these projects, you can ensure that you have enough money set aside to make them happen.

5. Make a calculated prediction of your revenue

While you aren’t expected to be able to predict the future, if you’ve been in business for a while, you should be able to make revenue projections based on past financial performance - as well as any financial growth you hope to achieve. Let’s take a closer look at both of those.

Past financial performance

If you’ve been trading for a year or more, look at your past financial performance. This will help you work out what’s achievable and will highlight any seasonal patterns that might be relevant. FreeAgent’s cashflow functionality shows you how your business has been doing and calculates a 90-day prediction of your cashflow future - not quite clairvoyance, but a great insight!

You can also use your knowledge of the market to determine whether your revenue is likely to be higher, lower or around the same as previous periods. Other factors to consider: do you know if a new competitor is about to enter the market, or is one potentially shutting up shop? Is demand for your product or service increasing or decreasing?

If your business is less than a year old, you may not have that financial data to pull from or the first-hand experience - but don’t panic. Instead, do some market research to assess your competitors and help you make educated assumptions about your potential revenue. 

Projected growth

If you have plans to grow your business in the upcoming year (e.g. expanding into a new market, opening an additional venue, increasing production or taking on more projects), include the revenue that you anticipate your business will earn from these activities in your business budget. 

6. Piece it all together

Once you’ve collated your expenses and revenue projections, it’s time to document your budget. Don't worry too much about the format. Word doc, spreadsheet or slide deck - the presentation matters less than the planning and thought you put into it.

What’s next?

Once you’ve prepared your budget and feel confident with the figures, refer back to it regularly to check your progress. Consider scheduling reminders to review your budget to ensure it doesn’t slip off your to-do list. Remember, your budget also doesn’t have to be set in stone - if circumstances or factors change, you’re free to make adjustments. As time goes on, you might find that you need to tighten your belt or that you’re able to spend more than you initially thought. Ultimately it’s a tool to help you keep your budget healthy and your business on track.

Ready to get a better handle on your business finances this year? Explore all the ways FreeAgent can help you with a 30-day free trial.